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Photo: James Bombales

Canada’s mortgage watchdog is warning lenders not to let their guards down in an environment where Canadian debt is growing faster than household incomes.

“Sound underwriting has always been important, but it has never been more important than it is now,” says Jeremy Rudin, head of the Office of the Superintendent of Financial Institutions (OSFI), in published comments from the 2016 Mortgage Professionals Canada National Conference in Vancouver.

“When house prices have been rising for several years and interest rates have remained at all-time lows, complacency can set in,” he adds in remarks dated November 28th, the two-day conference’s second day.

OSFI is an independent Canadian government agency tasked with overseeing federally regulated financial institutions, including the country’s biggest banks and insurance companies.

The lenders that OSFI supervises issue close to 80 per cent of the mortgages that borrowers take on in Canada.

Whenever assessing a borrower’s potential ability to repay their loan, financial institutions need to take a long-term view, Rudin notes in his speech.

“The recent uptick in mortgage interest rates should serve as a reminder that low rates are not a given, especially over longer periods of time,” Rudin continues.

“Relying on standard practices that worked well when interest rates were at ‘normal’ levels is probably not sufficient when rates are at historic lows,” he explains.

Rudin links the current period of historically low interest rates, which stretches back several years, to elevated household debt levels.

In June, the Bank of Canada flagged increasing household indebtedness as one of the financial system’s key vulnerabilities, one that had “moved higher.”

Last year, the country’s debt-to-disposable income ratio rose to 165 per cent, up from 163 per cent — a result of mortgage-credit growth — according to the central bank’s June 2016 Financial System Review.

For every dollar Canadian households had in disposable income, they owed $1.65.

“A pronounced a prolonged economic downturn could well involve a meaningful housing price correction. This could translate into significant losses for lender and insurers,” says Rudin of OSFI.

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